The FOMC Two Step: This Is How We Roll
50 Basis Points Forward, 25 Basis Points Back, 100 Basis Points Forward, And Then Double Time It To Macklem Doctrine
Summary:
· The Macklem Doctrine of America’s global imperative may make bigger fools out of the FOMC than the incoming inflation data.
· The White House Indo-Pacific Doctrine is Macklem Doctrinaire in principle.
· China is already applying Macklem Doctrine.
· James Bullard no longer has credibility.
· The Fed may embrace Macklem Doctrine when it sees the unrealized losses on its balance sheet from the recent spike in yields.
The currently incoming inflation data is making fools out of those FOMC members who are trying to finesse their guidance and their actions. The geopolitical situation may make even bigger fools out of them when they are called upon to align the Fed’s balance sheet with the American global imperative. The time for this strategic alignment appears to have arrived already.
Can’t afford to tighten, so just won’t tighten ….
This author has already discussed the thirty-year growth narrative under construction in the developed economies. This narrative has been obscured by the inflation story. Treasury Secretary Yellen has been the only one keen to embrace, and proselytize, the growth narrative against the deteriorating inflation backdrop.
Whilst Bank of Japan Governor Kuroda has indirectly addressed the growth narrative with his latest pledge, not to tighten monetary policy in the rest of his term, Bank of Canada Governor Tiff Macklem is, officially, the first developed market central banker to directly address the matter.
Macklem Doctrine, quite literally, believes that economic policymakers should be “producing growth with less inflation”. This would seem to beg the question of what they have been trying to do, recently, but he sounds sincere enough.
Macklem’s view may come from his unique vantage point, from where he sees that the striking truckers, and related anarchists, have brought the Canadian economy to its knees. His informed observation, of the fragility of supply chains, is, however, no less germane as a consequence for the American economy.
Macklem sees the strong case for supply-side investment, to bring the quantity and quality, of supply up to the current level of aggregate demand. Compare and contrast his view with that of Fed Chairman Powell, and Kansas City Fed president Esther George, who both wish to shrink aggregate demand to the level of constrained supply.
Reserve Bank of Australia Governor Philip Lowe may soon embrace Macklem Doctrine. For now, he may have fallen short of calling for a supply-side stimulus, yet, he is in no mood to tighten monetary policy either.
ECB President Christine Lagarde looks like a spiritual follower of Macklem Doctrine. Lagarde has decided to fight fire (and mutiny in her team) with fire and, also, to call an expensive spade a spade. Following this tactical initiative, the ECB President recently took it to the Germans, in an interview with the pejorative Redaktionsnetzwerk Deutschland.
Lagarde’s cheeky interviewers asked her if she still did the family shopping, thereby, questioning her awareness of the current inflation problem. The fast-witted Lagarde quipped, in response, that she also fills the petrol tank; and observed that the ECB is neither a hydrocarbons exploration company nor a logistics and transport company. Its implied ability to address the root cause, of the current inflation problem, is, hence, limited, however, it does its best to address rising inflation expectations. Game over, the interviewers had lost the game of blaming the ECB for inflation.
Lagarde was, then, able to turn the remaining barbed questions around, in order, to explain that the real physical constraints on supply, which are causing inflation, will remain in place, effectively, for good. Inflation will, thus, get baked in, but then accrete more slowly, in the future, due to baseline effects. Simply put, the rally in the price of oil from the pandemic start, when you couldn’t give a full tanker away, to today, will not be replicated at the same pace going forward. This baking-in process is one that is an economic headwind for the Eurozone, that, in her view, the ECB should not aggravate by tightening monetary policy aggressively. By logical extension, inflation is, also, a headwind for the global economy that global central banks should not react to aggressively.
Powell and George, apparently, still can’t see the growth headwind-wood for the inflation trees. Neither can they see the importance of China and its economy. Perhaps when they see the size of the unrealized losses on the Fed’s balance sheet, from the spike in yields this year, all else will be revealed. Going to the Treasury and asking to be bailed out, when one has ostensibly just bailed out the US economy, would seem to be a comedy of errors that will irreparably damage the currently fragile foundations of the partisan American polity.
President Xi Jinping and the PBOC do not intend to wait around to find out if China can afford it or not. They are both off, down the Belt and Road, in the global pursuit of growth.
The Panda in the pagoda ….
· FOMC speakers, ex-Barkin, continue to ignore China at their peril.
(Source: the Author)
Whilst FOMC members, ex-Thomas Barkin, continue to ignore the Chinese economy the focus and attention of their global peers are drawn towards it. The latest self-confessed China-watcher is BOJ board member Toyoaki Nakamura.
Nakamura-san’s most recent observation informs that China's "zero-COVID" restrictions could, potentially, restrict world growth by extending supply chain disruptions and increasing global inflationary pressures.
Whilst its central bankers, bar one, are blind the White House has, at least, one eye on China.
The Panda in the Oval Office ….
“We envision an Indo-Pacific that is open, connected, prosperous, resilient, and secure—and we are ready to work together with each of you to achieve it.”
President Joe Biden
East Asia Summit
October 27, 2021(Source: whitehouse.gov)
In what appears to be an increasingly Eurocentric, that is to say, Ukrainocentric world, the White House has finally released its twelve-page, guide for the perplexed to America’s Asian intentions and capabilities. Along with the declaration, came action, in the form of a pre-opening of the first American embassy in the Solomon Islands. Contextually, Secretary Blinken has reframed the Ukraine crisis as a window through which Asia can view America’s global strategic intentions and capabilities. An escalation in Ukrainian hostilities is, thus, a proxy for an escalation in anti-Chinese hostilities.
The new White House document is entitled “Indo-Pacific”, not Sino-Pacific, so one can clearly see the ancient regional ethnic tensions being aligned, with economic interests, from the get-go. Basically, any Asian nation with declared Indo, rather than Sino (or Eurasian), origins is one of the team. It’s a numbers game, and the Indo population is collectively younger, and larger than the Sino population. This Indo community just needs to be aligned economically, politically, and militarily. All this will take time, money, and the Fed’s balance sheet, in due course. But hey, it’s the only real global growth story in town right now!
This new growth story has yet to be framed, Macklem Doctrinaire style, as disinflationary but, necessity being the mother of invention, it soon will be. Perhaps the eponymous Canadian central banker may soon opine.
President Biden reminds all those who may have forgotten, that the Federal American Republic is, despite all its secessionist tendencies, still committed to the Constitutional, principles of “openness, connectedness, prosperity, resilience, and security.” Since China is currently, committed to a policy of American exclusion this cannot end well.
The big question, that will be answered going forward, is who guarantees the security and is, hence, the gatekeeper to the Indo-Pacific region. The Fed will, simply, have to get into line with American strategic economic interest when it is called upon to do so. A shrinking Fed balance sheet would seem to be the antithesis of such a strategic alignment of interests. Ignorance of all things China would, also, seem to be unpatriotic, not to say, treasonous.
Blinkered, strategically unpatriotic, FOMC members may, also, need to look South as well as West.
The Panda with the Belt on the Road to the Bay of Pigs ….
Towards the end of last year, this author began to focus on Chinese reciprocal reaction, in Latin America, to American action in Asia, under the broad heading of China’s Belt and Road strategy. Argentina has become a recent, headline, notch on China’s widening Latin American belt and destination on its lengthening road.
· The American thirty-year narrative involves the funding and creation of a bipartisan consensus from the perceived Chinese threat via Latin America.
· In view of the thirty-year narrative timeline compression, the Fed has limited time and space available to taper.
(Source: the Author)
Traditionally speaking, in relation to American foreign policy, now would be a good time for another currency crisis in Argentina, triggered by Fed monetary policy tightening, as an American response to Chinese moves. The IMF then steps in and tightens the US Dollar belt around the Argentinian economy. That play has not aged well.
Yuankee go home ….
The Yuan is also establishing its own reserve currency status in the Emerging Markets space, which threatens to challenge the global reserve status of the US Dollar. The Peoples’ Bank of China (PBOC), and its monetary policy settings, are more in sync with the Emerging Markets economic cycle than the Fed and its own settings.
(Source: the Author)
The problem, however, with this playbook, is that China now has the intentions and capabilities to bail out Argentina, and then wrap its own belt around the Argentine economy. A regional economic crisis, triggered by rising US interest rates could simply play to China’s strengths. As already noted, Chinese economic policy is more in-sync with emerging markets, so the FOMC is playing to China’s strengths.
Signaling a regional pattern developing, Ecuador has recently stated that it will seek to expand Chinese trade by 35% going forward. The Ecuadorian finance minister Simon Cueva positively rubs his fingers at the prospect of extorting more funding, from China and the IMF, by playing the two creditors’ strategic regional interests off against each other. Sitting on the fence may appear to pay handsomely until one is paid even more handsomely to fall on one side, and then handsomely nudged when one doesn’t.
· The global definition of “Common Prosperity” is being hotly contested, with China, in Asia, Latin America, and Cryptocurrency.
(Source: the Author)
The custodians of the US Dollar’s global economic hegemony are, currently, focused on dealing with the threat that El Salvador’s shift to the Bitcoin Standard represents in the region. Fitch has recently downgraded El Salvador, citing Bitcoin, and its volatility, as the main reason.
Perhaps Secretary Yellen needs to go regional with her supply-side stimulus, South of the border. Perhaps, she will. Perhaps, this is what she is sticking around for.
When the facts change, I change my mind (sic) ….
The last report discussed the, increasingly, desperate White House response to the declining political fortunes of President Biden. Anticipating a weak employment report, the White House had swiftly given ownership of the employment situation to the Fed. On the arrival of a good report, this ownership was swiftly wrestled back, and credit claimed for the President’s economic stewardship. Living from one jobs’ number to the next, and then spinning the data, is an economic policy, of sorts, that the voters will quickly discover and tire of.
Thirdly, in response to the trap being set for the FOMC, by the White House, this author expects “Supply-Side Janet Yellen” to start promoting her own pre-flagged solution, which is a fiscal stimulus aimed at unblocking supply chains.
(Source: the Author)
Whilst the latest jobs data, may appear to put Janet Yellen’s, alleged, supply-side fiscal stimulus on hold; the Treasury Secretary remains irrepressible. If anything, the stronger economic data has convinced her that a supply-side stimulus is required to match supply with growing demand. Yellen has recently reminded her detractors that she has unfinished business and will not be going anywhere.
You can peak too soon at best, and never reach your full potential at worst ….
In the last report, the opinions about the labor market of Richmond Fed president Thomas Barkin, and San Francisco Fed president Mary Daly, were seen to be converging. Neither sees the current appearance of economic overheating as real. Rather, they see it as a combination of demographic and COVID-19 related factors. Consequently, neither FOMC official wishes to follow an aggressive interest rate hiking trajectory, beyond the first move in March.
Daly’s position has received further empirical support from her staffers. Her team finds that, based on the demographics of retirement, a full recovery of the labor market is two years away. So as not to conflict with the current FOMC course of action and, thereby, compromise Daly even further the analysis frames the distant full employment arrival as a hypothetical one. This hypothecated level, of full employment, is one that represents the American economy’s maximum potential employment, based on its aging demographic structure.
However Daly’s team dresses up the results, it cannot hide the fact that by prioritizing inflation, and tightening monetary policy, there is a risk that the resultant economic headwind may push out the theoretical arrival at full employment even further than 2024.
Fifty basis points steps forward in March, twenty-five basis points steps back (in February!!!) ….
Cleveland Fed president Loretta Mester is trying her best not to be “overly aggressive”. Her most recent try involved clawing back at least 25 basis points, from the originally “overly aggressive” signal, from Atlanta Fed president Raphael Bostic of a potential 50 basis point rate hike in March.
Bostic is, apparently, quite capable of walking back the 25 basis points, of his 50 basis points potential rate hike, based on the unscientific principle of “hope”. His hope does, however, have some empirical basis, in his observation that month-on-month inflation readings are abating. This is just as well, since Bostic had previously proclaimed that he observes and adapts. He can now say that he observes, and adapts, and then hopes. Ironically, Bostic also hopes that the US economy is slowing down.
Bostic’s immediate hopes were dashed by the latest CPI data, which showed year-on-year inflation measures accelerating, although monthly changes remained elevated but no worse.
Bostic may be hopeful, but he is no liar. It would seem that his hope, is in fact, based on the 1-month Flexible, and the 1-month Core-Flexible inflation data recently produced in the Atlanta Fed’s Sticky-Price CPI report. The 3-month and 12-month Flexible and Core Flexible trendlines have yet to roll over. The Sticky CPI trendlines are still climbing, thus, forcing Bostic’s hope to spring flexible, rather than eternal.
The divergence, of the Sticky and the Flexible inflation readings, speaks, to what is transitory and what is not in the inflation basket.
…..100 basis points steps forward in July …. Fool me twice …. Shame on me ….
Famous last words: “at least sitting here today”, and gone tomorrow ….
Jay Powell may be in the Chair, but James Bullard is at the wheel and will take ownership of the results of the aggressive taper when it is perceived to have failed.
(Source: the Author)
Bullard is in the unpleasant position of being the key man in the FOMC’s accelerated response to the inflation spike. No tears should be shed, for Bullard, since he asked for it. Now he appears to have broken it, so now he owns it.
In the last report, Bullard was swiftly discounting the need for a 50-basis point interest rate hike at the March FOMC meeting. Fast forward, to the latest CPI report, and Bullard is now saying that, not only is it Powell’s call but, he also wants to see 100 basis points by July. Bullard has, thereby, imparted the wisdom (and chaos) of a potential inter-meeting rate hike. With this flip-flop-flip move, the last vestiges of Bullard’s credibility, and reasonable track record, to date, during the pandemic, have gone up in flames.
And so, King James is gone tomorrow, after all.
So, who’s on next?
Long live King Thomas, or at least until the March FOMC meeting!
Famous last words: “If you can keep your head, and say Holy Cow, when all of those around you are losing theirs, and shouting Katie bar the door, you should be the Fed Chairman my son!”
(Source: the Author)
The contrasting guidance, and unfolding career fortunes, of Richmond Fed president Thomas Barkin and James Bullard, reflect their relative positions on the subject matter of interest rate hikes.
In the last report, Barkin was observed to be surprised at the aggression of his FOMC colleagues, in the absence of their full understanding of the US labor market and Chinese supply chains.
Barkin’s surprise has been modulated, recently, but he still remains unconvinced of the utility of a supersize rate hike in March, or inter-meeting, and, hence, the state of mind of those in favor of it. Barkin would, evidently, vote to hike in March but would not go above 25 basis points based on what information and data he currently has to hand.
The information from Main Street remains inconclusive.
Cry Wolf on Main Street ….
Main Street, or at least that part of it at the wholesale level, is sending signals that the purported economic strength, seen towards the end of last year, was just a case of GDP going into inventories. Commensurate wholesale trade sales were of a lesser magnitude. With this in mind, the search for value and safety, currently rotating around in the equity markets, needs to be recalibrated for weakening growth.
The recent, market, fascination with inflation hedges has, also, received some new context during this earnings season from Unilever. The consumer staple giant sees inflation taking a chunk out of profits for another two years even with top-line sales growth. Those rotating into perceived safety should take note that safety is not all it used to be when there is inflation currently hanging around.
The travails of Unilever reflect the larger debate splitting opinion and market positioning.
The adversarial positions of Paul Krugman and Larry Summers, neatly, encapsulate the unfolding dialectic.
For every Summers there is a Krugman, and for both, there is a Macklem ….
On the one hand, Summers wants immediate monetary policy tightening. On the other hand, Krugman wishes for moderation. Neither have, yet, considered Macklem Doctrine, although Krugman is leaning that way. Janet Yellen has considered Macklem Doctrine, in spades, and she ain’t goin’ nowhere.
China has not only considered Macklem Doctrine, it is pro-actively applying it.